Investors in October pulled $8.8 billion from Chinese stocks and bonds, continuing the exodus that began after the United States and Europe imposed sanctions on Russia over its invasion of Ukraine. , according to the Institute of International Finance (IIF). Meanwhile, manufacturers trying to strengthen fragile supply chains are turning to Vietnam or India instead of China.
“There’s a big shift going on,” said Andrew Collier, an economist at GlobalSource Partners in Hong Kong.
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Business groups applauded Biden and Xi for stepping back from open confrontation and said a planned follow-up meeting between top US and Chinese officials could herald further improvements. But, at least for now, the relationship between the world’s two largest economies seems to be stuck between the cracks and the mutual aid.
The three-hour meeting on the Indonesian island of Bali was different from the Trump-era summit, which has been dominated by trade and tariffs. This time, the US readout touched on Taiwan and human rights in Xinjiang, Tibet and Hong Kong before addressing “continued concerns about non-market economic practices”. China, which is harming American workers and families.”
On the other hand, the Chinese government rejected the idea of an inevitable conflict. Biden, who last month banned China from acquiring US computers and related equipment, assured Xi that the US does not intend to “separate” from China or restrict its economic development, said the Ministry of Foreign Affairs of China.
“Starting trade wars or technological wars, building walls and barriers, and pushing for destruction and cutting of supply chains are against the principles of the market economy and undermine the principles of international trade. . Such an attempt is not beneficial to anyone,” said a Chinese account of the meeting.
The meeting, however, failed to resolve the cloud that covered the financial relationship between the giants. Several investment funds this year, including public employee pension plans in Florida and Texas, have reduced or eliminated their Chinese holdings.
On Tuesday, S&P Global Ratings warned investors about the consequences if the United States were to impose Ukraine-style sanctions on China. With the Chinese economy twice as large as Russia’s, the economic fallout will be enormous.
Blocking Chinese financial institutions from using the U.S. dollar — perhaps in response to an upcoming attack on Taiwan — could make them unable to make the necessary interest payments on their bonds, S&P said. Of the 170 bond offerings by Chinese banks, investment firms and insurance companies over the past three years, none allow repayment in currencies other than the dollar, the rating agency said.
Setting up a national security alert has already reduced conventional investments in the past.
BlackRock, which manages more than $10 trillion in assets, has scrapped plans to launch a new fund that would invest in Chinese government bonds, fearing it could be fueled by anti-government sentiment. China in Washington, according to the Financial Times.
It’s easy to see why the company has resisted: This week, the House Financial Services Committee held a hearing on the potential national security risks associated with allowing the US funding of “foreign adversaries and adversaries.”
While some investors fear Washington’s actions, others are concerned about China’s political developments. US investment firm Tiger Global Management reduced its Chinese holdings after Xi broke new rules last month and began a third term as president. China – leading some observers to believe that he intends to rule indefinitely.
The company is reeling from Chinese investment amid rising geopolitical tensions and economic fallout from Xi’s strict zero-covid policy, according to a person familiar with the decision. who spoke on condition of anonymity to discuss internal company consultations.
After the recent 20th Communist Party Congress in China, investors are concerned that market-oriented economic development is no longer the government’s top priority. Instead, Xi is increasing the role of the state in the economy and strengthening personal rule.
“The biggest open question is whether China is a safe environment for foreign investors,” Carl Weinberg, chief economist for High Frequency Economics, wrote in a client note on Tuesday.
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Since 2019, foreign investors have flocked to China’s bond market to take advantage of higher returns than those available in the United States. But in recent months those flows have reversed.
Foreign investors poured $70 billion into Chinese bonds in the four months since March, the IIF said.
The February 24 invasion of Ukraine and the start of the Federal Reserve’s interest rate hike in March have caused investors to rethink their positions, said David Loevinger, managing director. the emerging markets group for TCW, a Los Angeles-based asset management firm.
“In the [Winter] Olympic Games [in Beijing], Xi gave Putin the big bear hug and two weeks later, the tanks were rolling,” said Loevinger, a former US Treasury Department official. “People asked if China was under sanctions. Of course, this is a concern. “
Additional capital flows could lead to Chinese stock markets. But the bigger issue is how companies restructure their supply chains.
For decades, US and other manufacturers have been drawn to China because of cheap labor. But repeated production interruptions during the pandemic have convinced them to install multiple supply lines, despite the added cost.
Companies are looking for other sites outside of China for a number of reasons. US-China relations in general have continued to deteriorate. Repeated covid shutdowns have made Chinese businesses unreliable. And Washington’s bipartisan hostility to China makes executives wary of betting too much on the unpopular country.
Among the companies increasing production elsewhere is Apple, which will rely on India for the bulk of its smartphone products.
The Biden administration is promoting efforts to reduce US dependence on China for key minerals, pharmaceuticals and electric vehicle batteries.
US imports from China are currently below their pre-trade war trend, according to a recent study by economist Chad Bown of the Peterson Institute for International Economics. The United States now buys products such as clothing and shoes from Vietnam that it previously bought from Chinese suppliers.
While the trade data does not show a wholesale divestment, direct investment across the Pacific is slowing. Chinese investment in establishing or acquiring American companies peaked in 2016 at about $49 billion, before falling to less than $6 billion last year, according to the Rhodium Group, a consultancy in New York. US direct investment in China has fallen from a peak in 2008 of nearly $21 billion to $8 billion in 2021.
For now, China’s long-distance migration seems to be about resetting future development rather than freely retreating from existing footprints.
A third of U.S. companies in China said they led new investments in other countries last year, nearly doubling the percentage in 2021, according to a recent survey by Americans in Shanghai. Only 1 in 6 companies are considering relocating their operations in China.
“Xi Jinping’s clear indication of the direction of his administration’s economic policies, which are unpopular with private companies, could discourage US investment in China and lead to the gradual continuation of the economic and financial situation,” said Eswar Prasad, former managing director of the IMF. now professor of economics at Cornell University.
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To be sure, after four decades of growing US-China alliance, there is little hope for a complete divorce. About $700 billion worth of goods will move between the two countries this year, an increase from last year and more than six times more than in 2000. according to statistics from the Census Bureau.
Chinese consumers are increasingly critical of the prospects of American companies including General Motors and Microsoft.
Companies also cannot easily copy Chinese production arrangements elsewhere. China’s ports, roads and rail networks are among the best in the world, making it difficult to leave the country.
“Without real political pressure, I don’t see it,” said Michael Pettis, a professor of finance at the Guanghua School of Management at Tsinghua University in Beijing. “After the covid, the main thing is that if you move outside of China, you immediately become uncompetitive.”
However, national security concerns overshadow the clean economy of both countries. In Washington, the Biden administration is working on new rules to discourage outbound investment in China. Xi wants China to produce more of the advanced technologies required for military and commercial power.
Expanding US-China trade relations under these conditions will not be easy.
“Competitive advantage is difficult to manage,” said Eric Robertsen, global head of research and chief strategy officer for Standard Chartered Bank in Dubai. “However, we must find areas where we can work together. It does no good for people to walk off the proverbial cliff.